German Utilities Bail Out Electric Grid at Wind’s Mercy

Thursday, August 21, 2014

Germany’s push toward renewable energy is causing so many drops and surges from wind and solar power that more utilities than ever are receiving money from the grids to help stabilize the country’s electricity network.

Twenty power companies including Germany’s biggest utilities, EON SE and RWE AG, now get fees for pledging to add or cut electricity within seconds to keep the power system stable, double the number in September, according to data from the nation’s four grid operators. Utilities that sign up to the 800 million-euro ($1.1 billion) balancing market can be paid as much as 400 times wholesale electricity prices, the data show.

Germany’s drive to almost double power output from renewables by 2035 has seen one operator reporting five times as many potential disruptions as four years ago, raising the risk of blackouts in Europe’s biggest electricity market while pushing wholesale prices to a nine-year low. More utilities are joining the balancing market as weak prices have cut operating margins to 5 percent on average from 15 percent in 2004, with RWE reporting its first annual loss since 1949.

“At the beginning, this market counted for only a small portion of our earnings,” said Hartmuth Fenn, the head of intraday, market access and dispatch at Vattenfall AB, Sweden’s biggest utility. “Today, we earn 10 percent of our plant profits in the balancing market” in Germany, he said by phone from Hamburg July 22.

Price Plunge
In Germany’s daily and weekly balancing market auctions, winning bidders have been paid as much as 13,922 euros to set aside one megawatt depending on the time of day, grid data show. Participants stand ready to provide power or cut output in notice periods of 15 minutes, 5 minutes or 30 seconds, earning fees whether their services are needed or not.

German wholesale next-year electricity prices have plunged 60 percent since 2008 as green power, which has priority access to the grid, cut into the running hours of gas, coal and nuclear plants. The year-ahead contract traded at 35.71 euros a megawatt-hour as of 3:54 p.m. on the European Energy Exchange AG in Leipzig, Germany.

Lawmakers last month backed a revision of a the country’s clean-energy law to curb green subsidies and slow gains in consumer power prices that are the second-costliest in the European Union. Chancellor Angela Merkel’s energy switch from nuclear power aims to boost the share of renewables to at least 80 percent by 2050 from about 29 percent now.

Power Premium
Jochen Schwill and Hendrik Saemisch, both 33, set up Next Kraftwerke GmbH in 2009 to sell power from emergency generators in hospitals to the power grid. Today, the former University of Cologne researchers employ about 80 people and have 1,000 megawatts from biomass plants to gas units at their disposal, or the equivalent capacity of a German nuclear plant.

“That was really the core of our founding idea,” Schwill said by phone from Cologne July 21. “That the boost in renewable energy will make supply more intermittent and balancing power more lucrative in the long run.”

Thomas Pilgram, who has sold balancing power since 2012 as chief executive officer of Clean Energy Sourcing in Leipzig, Germany, expects the wave of new entrants to push down balancing market payments.

“New participants are flooding into the market now, which means that prices are coming under pressure,” Pilgram said. “Whoever comes first, gets a slice of the cake, the others don’t because prices have slumped.”

“That’s in our interest as we want to encourage competition in this market,” Armasari Soetarto, a spokeswoman for the Bonn-based authority, said by phone July 18. “More supply means lower prices and that means lower costs for German end users.”

The average price for capacity available within five minutes has dropped to 1,109 euros a megawatt in the week starting July 14, from 1,690 euros in the second week of January, Next Kraftwerke data show. Payments for cutting output within 15 minutes dropped to 361 euros from 1,615 euros in January.

The number of participants has increased as the country’s four grid operators refined how capacity is allocated. In 2007, the grids started one common auction and shortened the bidding periods. Since 2011, power plant operators commit their 5-minute capacity on a weekly basis instead of a month before.
Balance Payments

Balancing-market payments to utilities totaled 800 million euros last year, similar to the amount in 2012, grid data show. Utilities were asked to reserve 3,898 megawatts this week, which compares with Germany’s total installed power generation capacity of 183,649 megawatts as of July 16. One megawatt is enough to power 2,000 European homes.

Tennet TSO GmbH, Germany’s second-biggest grid operator, told power plant operators to adjust output 1,009 times to keep the grid stable last year, compared with 209 times in 2010. The interventions, used alongside the balancing market, are expected to be as frequent this year as in 2013, Ulrike Hoerchens, a spokeswoman for the Bayreuth, Germany-based company, said by phone on July 23.

To adapt to volatile supply and demand, RWE invested as much as 700 million euros on technology for its lignite plants that allow the units to change output by 30 megawatts within a minute. The coal-fired generators were originally built to run 24 hours a day.

RWE’s lignite generators, which have a total capacity of 10,291 megawatts, are flexible enough to cut or increase output by 5,000 megawatts on a sunny day, when power from solar panels floods the grid or supply vanishes as skies turn cloudy, according to Ulrich Hartmann, an executive board member at RWE’s generation unit.

“Back in the days, our lignite plants were inflexible, produced power around the clock and were always earning money,” Hartmann in Bergheim, Germany, said in a July 9 interview. “Now they are as flexible as gas plants.”